Senate Passes Small Business Investment Bill

JIM ABRAMS | Associated Press

WASHINGTON (AP) – Legislation to help startup companies raise capital by reducing some federal regulations won easy passage in the Senate Thursday despite warnings from some Democrats that less government oversight would mean more abuse and scams.

President Barack Obama supports the measure, which stands to be one of the few bipartisan bills to pass Congress during this politically contentious election year.

Sen. Pat Toomey, R-Pa., a leading sponsor of the legislation, said it "might be the most pro-growth measure that this body will consider, perhaps this whole year."

Democrats did manage to pass one amendment to increase investor protections, so the legislation will still require another House vote. The House passed the measure two weeks ago on a 390-23 vote. The Senate vote was 73-26 with all the negative votes coming from Democrats.

After the vote, House Majority Leader Eric Cantor, R-Va., said he would schedule a House vote on the Senate-passed bill next week "so we can get this bipartisan jobs bill to the president's desk for his signature without delay."

The legislation combines six smaller bills that change Securities and Exchange Commission rules so small businesses can attract investors and go public with less red tape and cost. It eases rules on advertising and permits startups to use the Internet and other social media to solicit a large number of small-scale investors.

The measure sailed through the House with almost no opposition, but met resistance in the Senate after SEC Chairman Mary Schapiro and numerous consumer and investor groups expressed concerns that it dismantles some of the protections put in place after the Enron scandal and the excesses of the dot.com era. Senate Democrats demanded that investor protections be added to the bill.

On Tuesday, the future of the bill seemed in doubt when Senate Republicans rejected Democratic attempts to add protections to the bill and link it to reauthorization of the Export-Import Bank, an agency that helps U.S. companies finance their sales abroad. The Democratic leadership decided to move ahead after deciding on two amendments that addressed some, but not all, of the investor protection concerns.

That wasn't enough for some Democrats. The Senate's no. 2 Democrat, Dick Durbin of Illinois, said the bill would "allow companies to use billboards and cold calls to lure unsophisticated investors with the promise of making a quick buck investing in new companies."

"We are about to embark upon the most sweeping deregulatory effort and assault on investor protection in decades," Sen. Carl Levin, D-Mich., said.

The centerpiece of the bill is a measure to reduce costs for companies seeking to go public by phasing in over five years SEC regulations that apply to "emerging growth companies." That status would be in effect for companies with annual gross revenue of less than $1 billion.

The measure would remove SEC regulations preventing small businesses from using advertisements to solicit investors, raise from 500 to 2,000 the number of shareholders a company or community bank can have before it must register with the SEC, and allow smaller companies to sell up to $50 million in shares, compared with $5 million now, without filing some SEC paperwork.

It also encourages the practice of "crowdfunding," in which the Internet is used to raise capital from a large number of smaller investors. The measure as it passed the House limits individual contributions to $10,000 or 10 percent of the investor's annual income.

Obama expressed his support for the original House legislation, but the White House also said it supported Senate Democratic efforts to add adequate safeguards for potential investors in light of any reduced government oversight of investment transactions.

The Senate passed, by 64-35, an amendment on crowdfunding that requires websites to register with the SEC, requires promoters who are paid by a company to reveal that fact and requires a company trying to raise money to provide information about its financial condition, business plan and shareholder risks. It limits investments to 5 percent of annual income for those earning under $100,000 a year, or 10 percent for those earning more than $100,000.

The less-regulated House version, said Sen. Jeff Merkley, D-Ore., one of the amendment sponsors, is "simply a pathway to predatory scams."

Crowdfunding is now banned because it is not legal to widely advertise and offer securities to the public without SEC registration.

A second amendment, promoted by Sen. Jack Reed, D-R.I., would have tightened the definition of "shareholder" so that large companies don't undercount the number of their shareholders in order to stay within the shareholder limit, set to rise from 5,000 to 2,000, for SEC registration. It fell on a voice vote.

The fate of the Ex-Im Bank was left undecided. Without reauthorization, the bank would have to stop operating on May 31, depriving U.S. companies of a crucial means of financing overseas sales. Even before that expiration date, the bank will hit its lending limit of $100 billion. The Democratic proposal would have extended that authority for four years and raised the lending limit to $140 billion.

Senate Republican leader Mitch McConnell of Kentucky said Republicans, while opposed to linking it to the small business bill, were willing to take up the bank's future in separate legislation.

House Majority Leader Eric Cantor, R-Va., said he is working on legislation to reform the bank, which faces greater resistance in the House. While supported by most major business groups, the bank is opposed by conservative groups such as the Club for Growth, which say it distorts markets and picks winners and losers.

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